Critics say Corbett's pension reform would increase costs

HARRISBURG — Gov. Tom Corbett has described the growing $41 billion deficit afflicting the state's two pension systems as Pac-Man because it keeps eating more and more revenue.

Corbett has proposed a three-pronged attack to tame Pac-Man's hunger as part of his $28.4 billion spending plan for the next fiscal year. He claims his proposals, which need legislative approval, would reduce taxpayers' costs to fund the Public School Employees' Retirement and the Pennsylvania State Employees' Retirement systems.

But a growing number of skeptics — from unions to the state treasurer to the independent state pension commission — say the governor's plan is fraught with legal and financial risks, and would increase costs over time.

Corbett's plan would first shrink the state's and school districts' contributions to free up $175 million for the state to spend on other programs and allow $138 million to stay in the school districts. Then it would decrease future benefits for active workers in 2015.

That year, new employees would not go into SERS and PSERS, which guarantees fixed monthly pension payments based largely on salary and years of service. New hires instead would move into a retirement system that works like a private-sector 401(k), which rides the ups and downs of Wall Street and does not offer fixed benefits.

"Resolving our pension crisis will be the single most important thing we do for decades to come," Corbett told lawmakers in his Feb. 5 budget address.

Critics say, a resolution may come through the courts, since Corbett's plan is likely to spark lawsuits.

SERS' and PSERS' long-term debts of $14.7 billion and $26.5 billion, respectively, are spread out over the next 30 years, actuarial reports show. Both debts are scheduled to be paid off in 2041-42.

If the debt wasn't so large, the state could more easily phase out SERS and PSERS, said James L. McAneny, executive director of the Public Employee Retirement Commission, which monitors municipal and state retirement funds and legislation that affects them.

New money from new employees helps cover the pension obligations to 698,363 active and retired members in both systems, he said. By eliminating that new infusion of cash, as Corbett has proposed, the plans would risk having their credit downgraded by bond agencies that may lose confidence in the state's ability to make good on its payments, McAneny said. And that, in turn, could force the state to speed up the repayment schedule because it would have to calculate those payments on a shorter time frame, he said. That time frame would be based on a 15-year average of the remaining worklife of SERS and PSERS employees instead of 30 years.

"If I can't pay it off in 30 years, which I'm doing now, how am I going to pay it off in 15?" he said.

But Corbett's administration said those fears are not justified.

Sped-up payments will not happen, said Budget Department spokesman Jay Pagni because the number of new hires who come into the 401(k) retirement system would be much smaller than the number of current employees who would remain in SERS and PSERS. There would be enough money coming into the systems to cover the debt until everyone retires in about 35 years, Pagni said.

Don Fuerst, a senior pension fellow at the American Academy of Actuaries in Washington, D.C., said closing a pension plan to new hires would not endanger it.

Rating agencies like Moody's and Standard & Poor's have no power to force the state to speed up payments and there are no actuary rules that would require it either, he said. The Government Accounting Standards Board is dropping guidelines in 2014 and 2015 that could have caused a small increase in liabilities under Corbett's plan but would not have sped up the payments.

Still, Corbett's plan has a big, costly problem, Fuerst said, because it is centered on reducing the employers' annual contribution rates by 2.3 percentage points. That, he said, would only increase the unfunded liability, which is the difference between the amount promised to current workers and retirees and the actual amount on hand. If the unfunded liability increases, costs would go up down the road, he said, because the funds' obligations must be met.

"You ought to be increasing the contribution, not decreasing," said Fuerst, echoing concerns also made by McAneny of the commission and state Treasurer Rob McCord, among others.

Pagni said costs would increase over time if Corbett only had proposed a reduction to the employers' annual contribution rate as Gov. Ed Rendell and the Legislature had done in 2010. But Corbett didn't do that, Pagni said. He offered three ideas that work in unison to save taxpayers about $11.5 billion through 2041.

Fuerst doesn't buy that argument. Corbett's proposals are separate and distinct from one another, he said, and the bottom line is reducing the employers' contribution rate will raise costs.